As if conditions were not gloomy enough in the United Kingdom, the International Monetary Fund recently downgraded the country’s growth forecast even as it offered a brighter outlook for the rest of the world. This was an odd and rather audacious move. While the UK certainly faces challenges, it is not clear that they have become any more difficult since the IMF released its last forecast in October 2022. If anything, a stronger global economy should benefit the UK, too.
Discussions about the UK’s never-ending gloom tend to ignore two trends that may be suggestive of a pleasant surprise, despite the current political leadership’s haplessness. I say “could” because much will depend on whether Britain can overcome the policy chaos that has prevailed since Brexit.
The first trend involves UK house prices, which is both a favorite dinner-party topic for homeowners and a persistent source of frustration for all those not fortunate enough to have gotten a foot on the homeownership ladder. Alongside the lack of social mobility, this is one of the UK’s central economic challenges. But the issue is not just high prices relative to incomes. Equally important are the regional disparities in housing prices.
For many decades, housing prices in London real-estate tended to rise by more than those elsewhere, the only exceptions being during big financial crises, when London prices also fell (typically owing directly to the crisis). But this pattern has been breaking down since 2015-16. If the apparent reversal of house-price behavior does constitute a new trend, it should be a massive positive story. British economic commentators, however, seem barely to have noticed it.
To be sure, the highest London house prices actually peaked before the 2016 Brexit referendum, because Prime Minister David Cameron’s government had adopted tax policies designed to discourage buy-to-rent house purchases (which were generally speculative bets by landlords on London property). But while urban house prices in other parts of England had already begun to outperform those in London before the referendum, Brexit reinforced the trend. The top end of the London housing market was hit hard by the break from the European Union, while most other markets were hardly affected.
Then came COVID-19, which ushered in the new era of remote work and radically increased the attractiveness of more affordable locations outside London. And that was followed by Prime Minister Liz Truss’s policy fiascos, which led to an abrupt spike in UK mortgage rates, making the London market even less affordable for many aspiring homeowners.
Against this backdrop, a recent issue of The Sunday Times Property section caught my eye with a story about the number of houses in the UK worth more than £1 million ($1.2 million). It found that, in 2022, the number of such homes in the London metropolitan area grew by less than in any other region (though London still accounts for around 10% of the overall stock). Nor is this story confined to the high end of the market. Delve deeper into the data and you will find similar trends across many price ranges.
Notwithstanding the obvious implications for lower earners, this trend could point to a positive development in the UK economy. It would be very good for regional productivity, social mobility, and the distribution of wealth if Britons are beginning to recognize that there are more opportunities to succeed in places other than London.
That brings us to the second under-noticed trend: the slow and steady success of devolution. Last year, for the first time ever, the UK Office of National Statistics reported productivity data at the level of individual boroughs. As expected, productivity growth was weak just about everywhere. Between 2004 and 2020, however, productivity rose by about 18 percent in Manchester, and by 21 percent in Greater Manchester, compared to just 15 percent in London. Moreover, if you strip out 2020, the first year of the pandemic, while Greater Manchester’s relative outperformance compared to Manchester recedes, it still persists vis-à-vis London.
These data are encouraging for several reasons. Not only have Greater Manchester’s house prices followed the broader pattern of regional outperformance over London in recent years, but Manchester itself has been a pioneer in the “devolution revolution” (former Chancellor of the Exchequer George Osborne’s catchphrase for the delegation of greater policy-making power to local governments).
By the summer of 2024, seven (mostly urban) areas in northern England will have adopted the same basic mayoral structure as Greater Manchester. If they can match Greater Manchester’s reformist zeal, they, too, could start to share in these modestly hopeful trends toward greater regional convergence.
Now, as promising as these trends are, it remains to be seen if they will persist. The UK is nowhere close to solving its regional problems. Despite Greater Manchester’s somewhat better outlook, it is still home to some of the country’s most underperforming areas, and its overall productivity remains a whopping 40 percentage points below London’s. Moreover, if non-London house prices rise too much, that will simply bring new affordability problems, especially if the higher costs are not accompanied by growth in productivity, real earnings, and living standards. Still, for now, both trends merit far more attention and study.
A former chairman of Goldman Sachs Asset Management and a former UK treasury
minister, he is a member of the Pan-European Commission on Health and
Copyright: Project Syndicate, 2022.